by Lombard Odier

Ukraine crisis leaves Europe at an energy crossroads

Russia’s invasion of Ukraine has focused attention on its role as a critical supplier of oil and gas. How will this affect the race to decarbonise?

Some 40 per cent of the gas needed to fuel European homes and businesses last year came from Russia. So did 46 per cent of the coal, used to generate electricity and to power heavy industry, and 27 per cent of the oil for transport and industrial applications. In fact, of all the goods and commodities sent from Russia to the European Union last year, energy represented the lion’s share: 62 per cent of total imports, worth €99bn.

Russia’s invasion of Ukraine has raised a series of questions over this strategy. Chiefly, should Europe be so dependent on vital supplies from such a hostile and unstable source? And should Europe be funding the Russian regime in this way? The answer to both questions, most analysts say, is a firm no.

Launching a new energy strategy in March, European Commission President Ursula von der Leyen said: “We must become independent from Russian oil, coal and gas. We simply cannot rely on a supplier who explicitly threatens us. We need to act now to mitigate the impact of rising energy prices, diversify our gas supply for next winter and accelerate the clean energy transition.”

That will be easier for some countries than others. The US no longer imports Russian oil, and the UK says it will stop by the end of this year. But for nations with few domestic sources, Russia is likely to remain a vital — if unpopular — source for some time. Germany, for example, has been accused by Ukraine's president Volodymyr Zelensky of continuing to pay “blood money” for Russian energy. Germany says it has no choice, that to turn off the energy taps without a viable alternative would stall Germany industry and throw the country, and probably the wider continent, into economic turmoil. One recent study suggests a hard stop to the Russian gas supply would cost Germany 12 per cent of its annual output – some €429bn.

The Ukraine crisis highlights a long-standing problem for governments: how to phase out fossil fuels. In the long term, that’s a necessary move to tackle climate change. But a flashpoint such as Ukraine also highlights the political benefits of developing independent sources of energy.

The situation remains volatile. In late April, Russia halted supplies of gas to Poland and Bulgaria because the countries refused to pay in roubles, raising tensions and prices. And early in May Ukraine halted flow through a transit point that delivers about a third of the gas Russia supplies to Europe.

It’s not a new concern. A sequence of international crises during recent decades has caused oil and other energy prices to spike, and ignited talk about the need to move away from fossil fuels. Most recently, both occurred when Russia invaded and annexed Crimea in 2014.

For leaders such as von der Leyen, the answer is greener alternatives. “The quicker we switch to renewables and hydrogen, combined with more energy efficiency, the quicker we will be truly independent and master our energy system,” she said in March. That’s music to the ears of environmental campaigners and renewable energy advocates, who argue that the Ukraine crisis shows the need to accelerate plans to decarbonise society and the economy.

Even countries that are less reliant on Russia, such as the UK, recognise that investment in domestic renewable capacity such as wind power can insulate the country from soaring energy prices. “The simple truth is that the more cheap, clean power we generate within our borders, the less exposed we will be to eye-watering fossil fuel prices set by global markets we can’t control,” says the UK’s Business and Energy Secretary, Kwasi Kwarteng. It’s not just renewables, though. Britain is one of several countries in Europe looking with renewed interest at new nuclear capacity.

The Ukraine crisis has also affected Europe’s emissions trading scheme, and the buying and selling of carbon credits. During the early weeks of the invasion, the price of carbon permits fell sharply, but it has since partially recovered. It’s not clear yet whether the carbon price, which is notoriously unpredictable, will reach levels that could help steer significant investment.

As energy prices rise, we tend to prioritise cheap sources over green. An easy substitute for gas in electricity generation would be gained with a switch to more carbon intensive coal; Germany has already postponed the closure of some coal-fired power stations. And, in response to some politicians who have used the energy crisis to attack net zero climate commitments, the UK government has pledged to look again at shale-gas extraction, also known as fracking.

Experts are dubious about that route. Professor Andrew Aplin, a geologist at Durham University, says: “Shale gas would only make a significant dent to UK imports if, over the next few years, thousands of successful wells are drilled at hundreds of sites across northern England. This isn’t realistic, so shale cannot make a material difference to our energy supply over the next few years — even with public approval for fracking.”

Renewables are a more reliable choice, critics say. And it’s a choice that many policy-makers are now wrestling with, as a growing number of consumers realise just where their energy comes from — and at what financial and human cost.

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